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ESG opportunities: how to create them

ESG opportunities: how to create them

With so many new developments and related potential pitfalls surrounding ESG issues, businesses are understandably focused on minimising the risks. But alongside those risks lie commensurate ESG opportunities, ripe for development by organisations with a clear understanding of their ESG position.

ESG risks versus ESG opportunities

The burgeoning environmental, social and governance (ESG) considerations facing organisations today are causing many to consider the inherent risks associated with ESG. Just as with corporate reputation, a single oversight or mishap can undo a once-strong ESG profile. It’s perfectly rational that many companies are taking a cautious approach to their ESG liability, especially as the issues have an increasingly high profile in the media, and among investors and other stakeholders.

While risk assessment is a valid entry point when considering ESG performance, ESG opportunities should not be ignored.

ESG issues as an area of corporate focus present a powerful means for companies to differentiate themselves from competitors, and be leaders in their sector.

It allows them to look inside and determine what is authentic to them as a business. And by taking a deliberate position on ESG issues, they demonstrate to interested stakeholders where they stand.

Measuring ESG opportunity

To surface ESG opportunities, businesses need to be able to measure their ESG position and track that position against their competition and sector as a whole. Because ESG is such a fast-moving topic, being mindful of newly emerging priorities, concerns, and expectations among different stakeholders – and how these priorities map back to the purpose of the organisation – allows its leadership to both articulate their ESG policy and position themselves more strongly.

An ESG analysis solution provides insight into where businesses are positively differentiated, where they can and need to do more to improve their ESG position, and the nature of their ESG materiality. Not every ESG issue is material to every business or every sector, and organisations need to be able to identify and manage those that will have an impact on them. These will change, sometimes rapidly, so ESG performance monitoring should be real-time and broad ranging.

According to the Boston Consulting Group, ESG factors are driven to become financially material by four trends: hyper-transparency, stakeholder activism, societal expectations, and investor emphasis on ESG. These drivers are all apparent in the quest to realise ESG opportunities.

Stakeholder influence on ESG opportunities

To meet the growing pressure from stakeholder activism, ESG policy decisions need to be aligned with stakeholder priorities. Those priorities will vary between stakeholder groups, and organisations need to consider the impact of the issue and influence of the stakeholder when formulating policy on any given ESG topic.

With the growing focus on sustainable investing, direct shareholders and institutional investors are among the stakeholders driving the need for ESG transparency, and opening up ESG opportunities. If fund managers’ investment research turns up a positive ESG profile, that business is better placed to win investment and its share price will rise. Responsible investment is increasingly central to investment strategies, and ESG reporting is being cemented within broader financial analysis.

Investment managers are not the only ones with a vested interest in a company’s ESG position. Consumers are increasingly making decisions about where to buy based on the sustainability practices of suppliers. Research by Nielsen shows that 81% of consumers believe corporations should help improve the environment.

Employees also perform better for employers who demonstrate a clear sense of purpose and offer them the same. Regulators require adherence to environmental and governance standards, as well as specific ESG disclosures. NGOs will target corporations with unsustainable practices and poor employment records, put pressure on investors, and use publicly available data to shame those with poor ESG records.

The demands of these stakeholder groups, combined with societal calls for greater transparency, increased availability of company data, and a hyper-connected world where everyone can share their opinion, mean organisations cannot be backward in coming forward over their ESG performance.

Authenticity underpinning ESG opportunity

Currently, the business world is in a state of hyper-reactivity around ESG topics, resulting in kneejerk behaviours, and driving a runaway bandwagon. While there are companies making ESG policy decisions for the right reasons, those that rush to launch charitable funds, retract sponsorship from those fallen from grace, or crowbar in support of the most media-worthy populist movement will struggle to see long-term benefit from such insta-ESG decisions.

Authenticity is the foundation of a successfully leveraged ESG opportunity. Those companies scoring highest in ESG ratings are the ones pursuing their ESG policy as if no one is watching. While it may seem obvious that sustainable practices and good governance are topics the communications function wants to shout about, a solid ESG position is based on doing these things because they are the right things to do. Not because they look good on a press release.

ESG may be the zeitgeist, but ‘bandwagonning’ is the opposite of effective ESG policy.

The ‘right thing’ doesn’t mean the ‘most ethical, environmentally responsible or socially conscious thing’. It means taking the action that is most aligned to the company’s purpose and business model. If the business is designed to make a profit and pay dividends to its shareholders, then an authentic set of ESG principles will recognise this. Likewise, an NGO needs its ESG policy to be aligned to its cause: any disconnect will create a liability rather than an opportunity.

Being transparent about what an organisation is there to do will open up ESG opportunities, because the decisions made about environmental, social and governance policy will all be targeted at the organisation’s core purpose. There is no value in trying to pretend to be what you’re not; doing so will only undermine your ESG position.

The long-term view of ESG opportunity

Those businesses that succeed in creating and utilising ESG opportunities will be the ones that take a long-term view – both of ESG issues and the business as a whole. Sustainability should be a watchword not just for the environmentally responsible, but for those that want to sustain and develop their business. Actions taken for the purpose of improving ESG scores should also be taken because they are the right decisions to sustain the business years into the future.

Organisations’ performance in the realm of ESG contributes to their success – or failure – and the speed at which ESG factors become material is constantly increasing. They need to respond proactively. But ESG policy should not be tactical or short-termist. Organisations that attempt to ‘ESG-wash’ their actions will fail to benefit.

ESG opportunity is not about being opportunistic, but about recognising the importance of an environmental, social and governance profile that resonates with all stakeholder groups, and aligns with the core purpose of the organisation. This isn’t a one time activity, but something that must be continuously reviewed to ensure the alignment is retained both now and in the future.

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